The ABS this morning reported inflation climbed 1.2% in the September quarter, averaging out at 5% through the year. According to the ABS:
- The most significant price rises this quarter were for rents (+2.1%), water and sewerage (+12.3%), house purchase (+1.3%), automotive fuel (+2.0%), deposit and loan facilities (+1.9%), overseas holiday travel and accommodation (+4.9%), electricity (+4.6%) and property rates and charges (+6.1%).
- The most significant offsetting price decreases were for child care (-22.9%), pharmaceuticals (-3.9%), audio, visual and computing equipment (-3.9%) and motor vehicles (-0.7%).
Crikey asked a group of leading Australian economists if a recession is our best hope of curing inflation?
Saul Eslake, Chief Economist, ANZ: No. I don’t think it’s a required ingredient at all. Inflation will fall partly because of the fall in commodity prices, and although in Australia that’s not the only factor, it’s certainly one of them. Secondly, consumer demand is going to be a lot weaker, which will lead to an increase in discounting and greater difficulty to passing on the impact of the weakening dollar. So I think the RBA is right to conclude that inflation will probably fall back under 3% sooner than we thought. Bringing on or tolerating a recession to get inflation under control would be very bad policy making indeed.
Adam Carr, Senior Economist, ICAP Australia: Absolutely not. It’s rubbish that inflation pressures are broad-based. When you look at the numbers that’s not the case. It’s being driven by the usual suspects — house food, fuel. Factors driving those aren’t demand driven. We just need a supply side response and we need to address some of the concerns around the credit crisis, and in particular issues around housing. I’m not seeing responses to those supply side issues. The credit crunch is global in origin, and to be fair, governments are dealing with that. But housing remains a huge issue. A lot more needs to be done, and by that I mean more houses need to be built. The first home owners grant is ok, but the most efficient way to deal with housing is build more. The response to date has not been adequate.
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Professor John Quiggin, University of Queensland: I would say yes, or at least a slowdown, although policy attention has switched to averting a recession. It’s now well understood that the consequences of a downturn are so dire that we have to take punt on inflation. Looking at the global situation, there is certainly some added comfort that inflationary pressures will decline. It’s already clear that Europe is suffering a substantial slowdown. China won’t be going ahead at the pace it was, and the US problems are well documented. With all those things taken into account, we can now have more confidence that inflation in Australia won’t charge ahead.
Paul Brennan, Citigroup Head of Economics: Not necessarily. The economy had been growing been growing rapidly for a long time and we’d eaten into spare capacity. I don’t think you need a recession, but a period of slow growth would help. A recession of course would have a dramatic effect but we don’t really want a recession. We’ve got inflation coming back into the target range by about 2010. The economy will slow, creating spare capacity, which will affect pricing power, and there will be some drop off in particular areas which have been pushing up inflation like financial services, thanks to the factors relating to the financial crisis beginning to ease. Housing certainly has been major contributor too, but with commodity prices easing, some of the cost pressures on new housing construction will moderate, helping inflation to moderate.